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Shared services and public to public cooperation under the new directive

18 December 2013

Peter Ware examines the codification of the Teckal case through the new public procurement directive.

In this article I am going to look at the codification of the Teckal line of case law which will be of critical importance for any public bodies that are looking to put in place shared services arrangements with other public bodies.

I think it is first worth having a look at the existing position under the public procurement regime. As a matter of principle, the European Procurement Directives (which have been incorporated into UK law by the Public Contracts Regulations 2006 (the Regulations)) potentially apply whenever a contracting authority awards a contract for goods, works or services to a party which is legally distinct from it and the value of the contract is over the relevant EU financial threshold.

Accordingly, a separate body, prima facie, should not be awarded a contract to provide services without the public body having gone through a fair and open procurement procedure in accordance with the Regulations.

However, a number of decided cases in the European Court of Justice (ECJ) have provided to contracting authorities an exemption from the scope of the EU procurement rules when contracting authorities are awarding contracts to in house entities. This entity is likely to be a company but could possibly be an LLP (subject to general powers issues with local authorities participating in LLPs).

The principal case which gave scope for this type of exemption was Teckal SRL v Commune DI Vialmo (case C-107/98) (Teckal). The test set out in Teckal is that whenever a contracting authority awards a public contract (as defined in the Regulations) to a body which is legally distinct from it, the procurement rules apply, unless:

  • the contracting authority exercises over the contractor a degree of control which is similar to that which it exercises over its own internal departments;
  • the contractor carries out the essential part of its activities with the controlling authority or authorities.

Moving on from this, the European courts have also recognised the possibility of public to public cooperation without the establishment of a separate controlled entity in Commission v Germany (case C-480/06) (Hamburg Waste). The court in this case held that there was no procurable contract between two or more public bodies where such arrangements were:

  • to facilitate genuine cooperation to perform a public task;
  • not to advantage any particular private entity;
  • to reimburse the costs of carrying out the tasks;
  • with a distribution of tasks (not necessarily equally) between the authorities;
  • with no private sector involvement in the agreement.

In the new directive the European Commission has looked to try and codify the position of the courts from both the Teckal line of cases and the decision in Hamburg Waste. These can be found in Article 11 which concerns contracts between entities within the public sector.

The article has been essentially split into three parts. Part one deals with a Teckal type arrangement where the controlled body is controlled by a single contracting authority. In order for the contract to fall outside the scope of the directive the following conditions must be fulfilled:

  • it must be controlled in a similar way to the contracting authoritys control over its internal departments;
  • the separate body must carry out 80 of its activities with its controlling public body;
  • there is no direct (with very limited exceptions unlikely to be relevant often in the UK) private capital participation.

You will of course note that, the first condition is largely what is required under the existing Teckal exemption. In relation to the second point, it has been accepted for some time that some form of external activity is permitted for Teckal vehicles. The introduction of a 20 figure for that activity is in excess of the figures previously understood to be acceptable and is therefore a broadly welcome clarification. The third condition is something which seemed to have been critical in the failure of claims for the exemption in more recent cases. Accordingly, it was inevitable that something like this was going to be included in the directive. However, this is something that will need to be carefully thought about when considering how best to capitalise any separate vehicle where funding is difficult to obtain from the controlling bodies.

The second part of the article provides that the conditions can be fulfilled by two or more contracting authorities who jointly control and own the vehicle. It goes on to explain how the control must be demonstrated, in particular:

  • the decision making body (for example the board of directors) are composed of representatives of all the controlling bodies, although a representative may be a representative of more than one body;
  • the controlling bodies are able to jointly exert decisive influence over the strategic objectives and significant decisions of the vehicle;
  • the vehicle does not pursue any interests which are contrary to those of the controlling bodies.

The first condition although perhaps understandable does not obviously come from the case law. However, its drafting does not make it clear whether this means that it must be exclusively made up of such representatives or whether there could be other non representative board members. The second condition is largely reflective of the current case law position. However, the third point is new and it is unclear why this is needed (in that by definition this body will be controlled by the contracting bodies and so why would it do anything contrary to their interests). Furthermore what would happen if a controlled body was found to be acting in such a way? This seems dangerously superfluous and could be utilised to second guess what the interests of the contracting bodies actually are.

Finally Article 11 endeavours to establish a Hamburg Waste type principle of public to public cooperation without the establishment of a separate vehicle. Such an arrangement will fall outside of the regime where:

  • the contract establishes or implements a cooperation between the participating contracting authorities with the aim of ensuring that public services they have to perform are provided with a view to achieving objectives they have in common;
  • the implementation of that cooperation is governed solely by considerations relating to the public interest;
  • the participating contracting authorities perform on the open market less than 20 of the activities concerned by the cooperation.

To some extent these conditions are less onerous than the existing case law position. The introduction of the market orientation in the third condition is something new and not something immediately apparent from the Hamburg Waste case itself. It is not clear why there was the change in emphasis from the first two parts i.e. concentrating on the 20 market orientation rather than the 80 activity with the contracting authorities, however the end result should not in itself be different. This codification is important as the Hamburg Waste case did stand on its own somewhat and having this put into the directive will give a firmer footing for this type of arrangement.

Finally, the article also confirms that the percentages referred to are based on an average turnover over a three-year period and it also makes it clear that the Teckal exemption works both ways i.e. the controlled body can award contracts to its controlling bodies without competition.

As a number of commentators have pointed out, Article 11 (and the other articles which attempt to codify existing case law) only really codifies the position (to the extent it truly codifies the position) at a fixed point of time. It is not feasible to take on all of the nuances which have come out of the case law in one article of a directive. Accordingly, although useful to have this starting point in the directive, it will not of course mean the end of case law in the area. Future cases will no doubt be used to interpret the meaning of various aspects of Article 11 and new cases will undoubtedly come along.

This article was first published by www.localgovernmentlawyer.co.uk

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Peter Ware

Peter Ware

Partner and Head of Government Sector

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